Supreme Court Hears Appeal on Phone Case

Washington -- The Supreme Court heard oral arguments last
week in a case that will decide whether federal regulators exceeded their authority in
establishing certain rules for local phone competition.

The Department of Justice, backed by AT&T Corp. and MCI
WorldCom, urged the court to vindicate its view that Congress directed the Federal
Communications Commission to impose pricing rules on states. Attorneys for state
regulators and incumbent local phone companies said Congress left pricing issues for the
states.

The case is important to a range of new players, including
cable operators, which are hesitant to enter local phone markets until cost issues to
lease incumbent phone carrier's network elements are cleared up.

The cable industry had urged the FCC to adopt uniform
national-pricing rules so that new entrants would face a predictable regulatory
environment on a state and regional basis.

The rules -- adopted two years ago by the FCC and designed
to break up the local phone monopoly -- were considered the agency's most important
undertaking under the Telecommunications Act of 1996.

However, a federal court overturned key potions of the
regulations, ruling that the FCC was not granted the power to set intrastate rates for
network interconnection when the parties turn to state regulators to arbitrate outstanding
pricing issues.

Members of the high court asked many probing questions
during an unusual two-hour session, which involved a complex debate over ambiguous, if not
contradictory, statutory terms in various provisions found in the 1996 law. The court is
not being asked to decide a constitutional issue, but whether it should defer to the
FCC's reading of the law.

U.S. solicitor Seth Waxman told the court that Congress, in
Section 251, gave the FCC new powers on intrastate prices.

But that comment caught the attention of Chief Justice
William Rehnquist and Justice Stephen Breyer, who noted that Section 2(b), passed by
Congress in 1934, prohibits the FCC from regulating intrastate communications.

Breyer at one point wondered whether Waxman was asking the
court to overturn state authority that had been in place for decades.

Diane Munns, general counsel for Iowa's Department of
Commerce, told the court that Congress, in Section 252, clearly assigned the states the
power to set pricing standards when the parties can't agree. The only role for the
FCC, Munns said, was for it to step in when a state failed to act.

Justice Sandra Day O'Connor withdrew from the case
because of stock holdings in AT&T Corp., court spokesman Ed Turner said.

O'Connor's absence left eight justices to decide
the case, meaning that the FCC needs five votes to win, while the incumbent phone
companies can sustain their victory in the lower court with a tie vote.